Apple turns over entire inventory every five days

A report from research firm Gartner says that Apple has an inventory turn metric of 74, which means that the iPad maker turns over its entire inventory once every five days, a staggering number for a consumer electronics company.

In its eighth annual Supply Chain Top 25 (viaBusiness Insider), Gartner analysts once again ranked Apple's supply chain as the best in the world, boasting an industry-leading 20.2 percent return on assets for the past three years as well as three-year revenue growth of 51.5 percent.

The Top 25 are calculated by creating a composite score, with the opinions of voters, Gartner analyst opinions and three-year weighted return on assets all counting for an equal 25 percent, while inventory turns and three-year weighted revenue growth account for 15 percent and 10 percent, respectively.

Apple stood out with a inventory turnover period of five days, calculated by dividing the 365 days in one year with the inventory turnover ratio or the cost of goods sold over uarterly average inventory, which in Apple's case is 74.1. The only other company to beat the Cupertino, Calif., electronics giant was McDonalds with 142.4 inventory turns equating to a 2.5 day turnover for total inventory.

Dell and Samsung followed Apple in the electronics category with turnovers every 10 and 21 days, respectively.

Kindle-maker and internet sales monolith Amazon took the second overall spot on three-year revenue growth of 37.7 percent and boasts an inventory turnover about once every 37 days. The way in which Amazon operates is novel, however, and continues to push the envelope of generally accepted inventory practices.

Source: Gartner

The ranking results may not be surprising given the pedigree of current Apple CEO Tim Cook, who is considered an "operational genius" and took over the company's supply chain in 1998, streamlining operations by cutting excess costs and built-up stock. An example of the changes made was Cook's decision to shut down 10 of the 19 company warehouses to limit overstocking, a move that brought inventory down from a month to only six days.

This sounds pretty impressive, but it would seem like a very large percentage of their sales are in inventory only while in transit to customers (if even that).

My guess is that when something is "in inventory", it is either in Apple's warehouse at the Shenzhen airport's freight terminal (where Apple pays export duties, taxes, etc.), or in an Apple Retail Store. A transfer between the warehouse and an Apple Retail Store might not be in inventory since it is likely that Apple would place the liability of goods into the hands of the freight agent.

Once it leaves the loading dock at the airport, it is no longer in inventory, whether it's a direct shipment to a consumer (i.e., someone who buys from store.apple.com) or to a channel partner (like a pallet of iPads headed to Best Buy).

If the online store says something will ship in 1-2 days, it's not in inventory either. It's still on the manufacturing line. If the online store says "available now or ships in 24 hours" it's in inventory.

If this story is to be believed, what's more incredible is Apple's ability to manage this down to their bricks-and-mortar stores. My hunch is that Apple's online store has an inventory turnover of one or two days and that their physical stores are closer to 7-10 days. It's clear that Apple's bricks-and-mortar stores aren't like Home Depots or IKEAs with lots of inventory on site. They are paying for some prime commercial real estate and it makes little fiscal sense to use that pricey square footage for storage.

This also hints at how scalable the supply chain is. Apple's manufacturing partners can mobilize extra workers or reconfigure lines very quickly. The largest Foxconn plant in Shenzhen allegedly employs 450,000 workers.

This sounds pretty impressive, but it would seem like a very large percentage of their sales are in inventory only while in transit to customers (if even that).

It's actually quite plausible. At one time Dell had extremely high inventory turns, as well.

The key is to not own inventory. That can be done in a number of ways:

1. Ship directly from subcontractor to customer. A device is ordered from Apple by a customer. Apple then orders the device from Foxconn. Foxconn ships directly to the customer. Apple never has the device in inventory, but gets to count the revenue. Given Apple's massive subcontracting, this undoubtedly accounts for a major part of their stellar performance.

2. Consigned inventory. The way it works is you receive the inventory and store it in your plant but do not take ownership until you actually use it. So your shelves do not have any of YOUR inventory, but are rather full of inventory that's on your supplier's books. Works best for fast moving parts. I doubt if Apple does this - usually, when you ask for consignment, the supplier charges a bit more or changes the terms in some other way. Since Apple is so cash rich, there's not much value to them to do this and certainly not if it means a higher price.

3. Just in time inventory. Let's say you're using 1,000 batteries per day. In the old days, you'd store several weeks supply on hand just in case of a supply disruption and then you'd take shipments of perhaps a couple weeks' supply. Today, many companies have gone to JIT inventory where you keep only a small buffer stock (days or perhaps even hours of production) and receive small, consistent shipments very frequently. In some cases, the supplier might have a small warehouse near your facility to ensure delivery. JIT works great and has a nice impact on plant flexibility and operation, but you need to trust your partner because a short delay in deliveries can be catastrophic. I believe I read that Apple uses JIT inventory.

4. Minimum SKUs. While some companies have a very broad product line, Apple keeps theirs focused. They don't have 100 different models of phones, they have 3 (with only minor variations of each one). They don't have 100 different desktop computers, they have 3 (again, with very limited variety). The broader the range of products you offer, the more inventory you need - and in my experience, inventory grows more than linearly with the number of SKUs.

Even with all of these tricks, Apple's numbers are phenomenal - particularly when you realize that a signify a significant percentage (about 11%) of their total sales - and they need to keep inventory for the retail stores. Without that, the numbers would be even better.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

Speaking of graphics that don't work... when is someone going to fix the smiley situation here? The site update has been an unmitigated disaster.

Yeah and the space problem is most likely in how the server software at AI is setup. Good UNIX servers are smart enough to handle spaces in file names. Windows has a habit of being dumb. This new forum software is something my teenage son could've done better than AI did. The problems we are seeing, are the fault of AI's IT staff. This is what happens you get when a PC IT person (I'm guessing they are from the lack of quality) gets to pick out the software they like and familiar with. It's mostly speculation on my part but I think that the AI staff are Windows people because the forum software works as well as Windows. ::rolleyes::

That's quite logistically impressive. Almost unbelievable, in fact. Are they sure this is not an error?

I don't think so. You can verify the numbers on Apple's 10-K. Apple has roughly $1 B in inventory on roughly $100 B in sales. Typically, one calculates inventory turns on the basis of cost, rather than sales, so that $100 B in revenues is equivalent to $60 B in cost (at 40% GM). $1 B in inventory to sell $60 B in cost per year is a 60x turns. That's fairly close since this is an approximation and the actual number depends on time period. For example, if they only considered the most recent quarter, the inventory turns approaches 80.

So their number is well within the right range.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

My guess is that when something is "in inventory", it is either in Apple's warehouse at the Shenzhen airport's freight terminal (where Apple pays export duties, taxes, etc.), or in an Apple Retail Store. A transfer between the warehouse and an Apple Retail Store might not be in inventory since it is likely that Apple would place the liability of goods into the hands of the freight agent.

Once it leaves the loading dock at the airport, it is no longer in inventory, whether it's a direct shipment to a consumer (i.e., someone who buys from store.apple.com) or to a channel partner (like a pallet of iPads headed to Best Buy).

If the online store says something will ship in 1-2 days, it's not in inventory either. It's still on the manufacturing line. If the online store says "available now or ships in 24 hours" it's in inventory.

If this story is to be believed, what's more incredible is Apple's ability to manage this down to their bricks-and-mortar stores. My hunch is that Apple's online store has an inventory turnover of one or two days and that their physical stores are closer to 7-10 days. It's clear that Apple's bricks-and-mortar stores aren't like Home Depots or IKEAs with lots of inventory on site. They are paying for some prime commercial real estate and it makes little fiscal sense to use that pricey square footage for storage.

This also hints at how scalable the supply chain is. Apple's manufacturing partners can mobilize extra workers or reconfigure lines very quickly. The largest Foxconn plant in Shenzhen allegedly employs 450,000 workers.

Your post is a guess, as you say. It's not quite true either. Apple gets deliveries to their stores every day to two days, in most instances, not every 7 to 10 days.

It's not in inventory until its checked in at wherever it goes once it leaves the factory, not when it first leaves.

Your post is a guess, as you say. It's not quite true either. Apple gets deliveries to their stores every day to two days, in most instances, not every 7 to 10 days.It's not in inventory until its checked in at wherever it goes once it leaves the factory, not when it first leaves.

That's not always true. There are different shipping methods - and ownership changes depending on the terms.

For example, if the product is shipped 'ex factory', ownership changes when it leaves the factory.

If it is shipped 'FOB' ('Freight on Board'), ownership changes when it is placed onto the ship.

Ownership can change when it clears customs or when it arrives at the terminal in the US, or any other time. The different shipping methods are described here:

That's not always true. There are different shipping methods - and ownership changes depending on the terms.
For example, if the product is shipped 'ex factory', ownership changes when it leaves the factory.
If it is shipped 'FOB' ('Freight on Board'), ownership changes when it is placed onto the ship.
Ownership can change when it clears customs or when it arrives at the terminal in the US, or any other time. The different shipping methods are described here:http://en.wikipedia.org/wiki/Ex_Works#Ex_Works

We're not talking about ownership. Inventory is different from ownership. Something can be on a ship in the middle of the Pacific, and Apple can own the products in that ship, but they are very definitely not in inventory. When I ordered materials and products for my companies, I owned most of it the moment it was shipped, but it wasn't in inventory until it was stocked at my company's stock rooms. The Apple online store has inventory at their warehouses. The stores have inventory in their own stockrooms or warehouses. But it's not in inventory until it arrives at Apple, at least, and not at a point of sale until it reaches there.